DENEL GROUP

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DENEL GROUP

ANNUAL REPORT 2014-15

PRESENTATION TO SELECT COMMITTEE ON COMMUNICATION AND PUBLIC ENTERPRISES

17 February 2016

DENEL GROUP

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CONTENTS

• OVERVIEW OF DENEL

• DENEL STRATEGY

• INTEGRATED REPORT

• HUMAN RESOURCES AND TRANSFORMATION

• SUPPLY CHAIN, CSI AND ENVIRONMENT

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OVERVIEW OF DENEL

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• Fully owned by SA Government

• Reports to Minister of Public Enterprises

• Company established in 1992

• Some facilities exist > 50 years

• Largest manufacturer of defence equipment in SA

• Experienced in supplying and supporting of

equipment around

the globe

6 900 employees

4 600 employees at core business units

2 300 employees at Associates

3003 Engineers, Scientists and Technicians

Annual turnover ± R5.8bn

Exports around 52%

12 Plants throughout South Africa

DENEL AT A GLANCE

DENEL GROUP

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B U S I N E S S U N I T S

49%

49%

30%

49%

* Previously known as LSSA -

As of 1 May 2015 100% owned

by Denel

DENEL GROUP STRUCTURE

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Rheinmetall

Denel Munition

Western Cape

(RDM)

Overberg Test

Range (OTR)

Denel Aviation (DAv)

Airbus Optronics

Denel Dynamics (DD)

Pretoria Metal

Pressings (PMP)

Mechem

Denel Land Systems

(DLS)

Rheinmetall Denel

Munition – North

(RDM)

Turbomeca Africa

(TMA)

Denel Vehicle

Systems (DVS)

Denel Aerostructures

(DAe)

DENEL FACILITIES

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DENEL STRATEGY

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Government policy e.g. Defence Review 2014

Market

Strategic intent

Denel strategy

Corporate plan

• Operating environment

• International and local markets in which we operate

• Mandate within which to operate

• Plan to achieve mandate

• Detailed implementation plan to achieve strategic objectives and shareholder’s compact

Shareholder’s Compact tracks and monitors progress against the

implementation of the strategic objectives

STRATEGY FORMULATION FRAMEWORK

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• The custodianship of assigned sovereign or strategic defence capabilities, technologies and abilities, inclusive of those that may be at risk, as the loss thereof would threaten South Africa’s required defence capability

• The design, development, manufacture and support of important capabilities which may not be commercially viable

DENEL is a national security asset, with the primary purpose of designing, developing, manufacturing and supporting defence

matériel. In addition thereto, DENEL is charged with:

• That the defence industry must be supported and prioritised as a strategic manufacturing

sector

• Emphasises the importance of the defence industry and Denel as a strategic national asset

• Stresses the importance of the strategic relationship between the DoD and the defence

industry

• Directs that Denel be the custodian of the Maritime as well as Command and Control (C2)

capabilities

• In formulating Denel’s strategy, the Defence Review is taken into account

• The review places certain obligations on Denel; describes the company as follows:

SA DEFENCE REVIEW 2014

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Support and maintain the DoD’s sovereign and strategic industrial defence capabilities in an efficient and sustainable manner

Contribute to industrial development towards the building of a dynamic defence related industrial cluster and to act as a catalyst for advanced manufacturing

Long term growth strategy aimed at increasing sales, product portfolio and service offerings

Pursue financial recovery and stability based on achieving profitability targets by increasing market share and achieving its revenue targets, as well as reducing costs

Ensure on-time and on-cost deliveries on major programmes

Contribute to socio-economic objectives including skills development and transformation

Compliance with local and international policies, regulations and treaties as well as regulations and laws of the jurisdictions of where Denel conducts business

THE DENEL MANDATE PER SHAREHOLDER COMPACT

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Security of supply and retention of

capabilities in areas required by the

DoD&MV

Retained strategic capabilities in support of

the DoD&MV’s requirements100% 100%

Programme deliveryMilestone achieved per DoD contract

deliverables85% >97%

STRATEGIC

ECONOMIC ROLEInvestment in R&D Self-funded R&D as a % of revenue 3% 2%

Revenue Increase in revenue year-on-year 12% 28%

Profitability management EBIT margin 4.50% 7%

Cash from operating activitiesCash-flow from operating activities before

working capital changes as a % of revenue2% 8%

Order cover

% of orders concluded in respect of the

coming year as a % of revenue budget for

that year

60% 77%

Operating expenses Operating expenses as a % of revenue 23% 16%

ACI as % of total appointments 75% 87%

Women as % of total appointments 20% 30%

Local contentLocal procurement as % of total

procurement70% 67%

Procurement from black-owned suppliers,

as % of local spend20% 22%

B-BBEE (recognised spend as a % of local

spend)70% 96%

Black woman owned as defined in the B-

BBEE codes (% of local spend)3% 8%

Black youth owned as defined, (% of local

spend)3% 1%

Small and emerging enterprises suppliers

developed to supply to the core business20 25

B-BBEE level B-BBEE contributor level (old codes) Level 3 Level 2

Training spend % of employee cost 3% 4%

Total number of engineering trainees

(bursaries and internships)90 92

Total number of artisan trainees 100 157

Total number of technician trainees - 9

Total number of DTA artisan and technical

skills trainees (enrolments during the year)300 355

Employment – direct jobs created Increase number of jobs 100 275

Corporate social investmentSpend on CSI as specified in the B-BBEE

codes1% 2%

Strategic intent Key Performance Area Key Performance Indicator Contracted Achieved

STRATEGIC ROLE IN

THE PROVISION OF

DEFENCE

CAPABILITIES

BUSINESS

SUSTAINABILITY

SOCIO-ECONOMIC

OBJECTIVES

Maximise the appointments from

designated groups in order to address

employment equity requirements

Preferential procurement and enterprise

development

Skills development – scarce and critical

skills

SHAREHOLDER COMPACT: KPIs – 31 MARCH 2015

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VISION

The credible

state-owned SA

strategic partner

for innovative

defence,

security and

related

technology

solutions

Grow revenue and

improve customer

relationships

Increase productivity,

efficiency and

profitability

Enhance capabilities

and foster innovation

Create a dynamic

and vibrant

organisation

• Significant increase to the

order book

• Strong relationship with

customers and stakeholders

• Leverage smart partnerships

• Optimised cost structure

• Strong balance sheet

• Profitable returns

• Operational excellence

• Increased R&D investment

• New technologies

• Expanded portfolio offering

• B-BBEE level 2 rating

• Skills development

• Transformed organisation

A dynamic,

vibrant,

financially

sustainable,

transformed

and profitable

organisation

STRATEGIC

DRIVERS KEY OBJECTIVES TO BE STATE

VISION AND STRATEGIC FOCUS

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Humanitarian demining services and products

Mine Protected

Vehicles

Technical Training

Munitions and

sub components

Unmanned

Aerial vehicles

Missiles

Engineering

services

Land based systems

( Artillery, Infantry

and Armour systems)

Maintenance repair and overhaul

Command and Control

Aerostructures

CORE PRODUCT PORTFOLIO

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Denel of the

future

Denel is the sustainable, strategic industry partner to the

SANDF, SAPS and other security agencies, with a growing footprint in Africa and globally

Denel leverages the SA government’s strategic

relationships for example SADC, AU,

IBSA and BRICS

Products and services are derived from

operational needs of our primary customers e.g. establishment of

Denel ISM, acquisition of DVS

Denel is a responsible leading security,

defence & aerospace company, allowing the

development of a strong supporting

industry

DENEL OF THE FUTURE

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Long term

growth

strategy

aimed at

increasing

sales,

product

portfolio and

service

offerings

• Concluded multi-year orders >R35bn order book

• Pursuing new opportunities >R20bn

• Focussed business development in key markets e.g. Brazil, UAE, Africa and Malaysia

• Leveraging country bi-lateral relationships BRICS, SADC and AU

• Pursuing defence but also commercial opportunities including SOC to SOC relations e.g. UAVs, space, drill bits, etc.

• Leveraging of significant contracts (e.g. Rooivalk, Mbarc, Al-Tariq, A400M and Hoefyster) for new work

PROGRESS WITH DELIVERING ON OUR MANDATE

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INTEGRATED REPORT

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The integrated report 2014/15 incorporates the following key sections:

• Chairman and GCEO reports

• Financial performance including performance against shareholder’s compact

• Operational overview, including high level business unit information

• Corporate governance, including risk governance, remuneration, stakeholder engagement

• Social responsibility information, including people management, CSI, occupational health

and safety and supply chain information

• Environmental responsibility

• Annual financial statements

o Consolidated statements of financial position

o Consolidated income statements

o Consolidated statements of cash flows

• Unqualified external audit opinion

INTEGRATED REPORT: 31 MARCH 2015

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Pursue

financial

recovery and

stability by

achieving

profitability

targets and

increasing

market share,

achieving

revenue

targets, as well

as reducing

costs

Net profit R270m

Revenue R5,852m

48% 52%

Local Foreign -

1 000

2 000

3 000

4 000

5 000

6 000

7 000

2015 2014 2013

Rm Revenue per region

South America

South Africa

Middle East

Europe

Asia Pacific

Africa

PROGRESS WITH DELIVERING ON OUR MANDATE

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Profits/(losses)

-

600

1 200

1 800

2 400

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Rm

Solvency

(1 561) (1 363) (549) (347) (533) (246)

111 41 71 194 270

(1 600)

(1 400)

(1 200)

(1 000)

(800)

(600)

(400)

(200)

-

200

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Rm

The group

continues to

improve on historic

results through

restructuring and

turnaround

interventions.

Denel has posted

profits for five

consecutive years

Strategy includes

growing profitable

revenue by

aggressively

driving business

development,

enhancing

technology and

capabilities, whilst

also driving

transformation and

efficiency

imperatives

Denel turnaround

GROWING TOWARDS FINANCIAL SUSTAINABILITY

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Actual Actual

Mar-15 Mar-14

Rm Rm

Inventories 1 511 1 020

Trade and other receivables 3 521 2 930

Cash and short-term deposits 1 909 1 513

Equity 1 927 1 664

Loans and borrowings 2 158 1 875

Denel remains heavily

invested in working capital

on the back of significant

growth and focus on

interventions to convert

balances to cash

Denel has developed a five

year debt repayment plan

Equity is steadily improving

ABBREVIATED BALANCE SHEET: 31 MARCH 2015

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Compliance

with local and

international

policies,

regulations

and treaties as

well as

regulations

and laws of

the

jurisdictions

where Denel

conducts

business

Strong governance

structures and cultures

Risk governance processes are in place

• Fraud prevention and anti-corruption including fraud hotline

• Ethics policy

• Compliance processes

• Complied with local and international codes, laws and regulations

Complies with King III Code of Corporate Governance

• Stakeholder management

• IT governance

• Sustainability reporting

Recognition for good corporate governance and reporting

Recognised for excellence in corporate reporting by Nkonki Inc. in top five SOCs in 2012, 2013 and 2014

Recognised by the JSE and Chartered Secretaries Southern Africa for excellence in corporate reporting with a Merit award

in 2014

PROGRESS WITH DELIVERING ON OUR MANDATE

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HUMAN RESOURCES AND

TRANSFORMATION

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PROGRESS WITH DELIVERING ON OUR MANDATE

Contribute to

socio-

economic

objectives

including

skills

development

and

transformation

White 48%

Black 52%

2014

White 51%

Black 49%

2013

Our attraction strategies are

working:

824 new employees appointed

87% were ACI

30% were female

275 jobs created

White 43%

Black 57%

2015

B-BBEE

LEVEL 2

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Detailed demographics of employees excluding associates are as follows:

EMPLOYEE DEMOGRAPHICS: 31 MARCH 2015

0

100

200

300

400

500

600

700

800

=< 20 21-25 26-30 31-35 36-40 41-45 46-50 51-55 56-60 >60

Employee age profile

25% of the workforce under

35 years of age

Job categories

African Coloured Indian White TOTAL Total per

category Male Female Male Female Male Female Male Female Male Female

Executive management 5 0 0 1 2 0 3 0 10 1 11

Senior management 10 7 1 1 3 0 25 5 41 10 50

Management 45 21 16 6 15 6 209 18 285 51 336

Professional Staff 1 019 289 160 80 80 10 1 238 125 2 495 507 3 003

Administrative Staff 91 117 21 29 0 6 39 138 151 290 441

Support Staff 75 42 24 9 3 5 55 43 157 99 256

Trainees 81 54 9 1 14 5 22 3 126 63 189

General workers 179 36 26 4 1 0 24 3 230 43 273

Total 1 505 566 257 131 118 32 1 615 335 3 495 1 064 4 559

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The defence industry is traditionally perceived to be male dominant. Denel is continuously working towards

better representation of women. We employ 1 064 female employees and 16.5% of our executives and

managers are female. In order to improve the representivity of women within the organisation, Denel

participates in various programmes that target female learners, such as:

FEMALE REPRESENTATION

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68% 69%

71%

76% 78%

81%

2009/10 2010/11 2011/12 2012/13 2013/14 2014/15

ORGANISATIONAL CULTURE

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400 SCHOOL’S OUTREACH PARTICIPANTS

340 BURSARS, APPRENTICES, TECHNICIANS, INTERNS

800 LEARNERS SPONSORED

SKILLS DEVELOPMENT PROGRAMME

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4% of payroll spent on employee training

EMPLOYEE FOCUSED SKILLS DEVELOPMENT

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SUPPLY CHAIN, CORPORATE

SOCIAL INVESTMENT AND

ENVIRONMENT

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TRANSFORMING SOCIETY THROUGH SUPPLY CHAIN

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• PMP’s enterprise and supplier development programme

o Training provided to 20 MVs

o 2 Supervisors

o 18 General workers

Total cost: R10 500

• Contract to a MV for the recovery of old ammunition – as part of demilitarization

o R2.2m

• R1.9m worth of machinery donated to MV company

• DLS spent ±R3.3m on Sebenza – a freight-forwarding company partly owned by

MV in 2014

SUPPORT TO MILITARY VETERANS

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Contribute to

socio-

economic

objectives

including

skills

development

and

transformation

Spending R69m towards skills

development within the financial year

Schools outreach programme (SOP)*

in North West, Gauteng,

Mpumalanga (400 participants);

STEM career awareness to over

15000 learners nationally

Saturday school by Denel volunteer engineers who

provide extra tuition to learners in Maths

and science

Other STEM focused initiatives, including;

donation of computers, mobile

laboratories, support the building of a

school, provision of a library etc. impacting 5725 learners in the

9 provinces

*SOP in Gauteng: Olievenhoutbosch, Etwatwa, Reigerpark; North West: Orkney at Vaal Reefs Technical including Arefademeheng, Monkeng, Thuto Tsibo;

Mpumalanga: Masibekela at MC Zitha including Mzabu, Mbhunu, Lubombo, Steenbok, Samora, Mbhudula Sophungane, Zenzele, Lomasha, Phumula & Ntiyi

CSI RESPONSE TO THE MANDATE

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Key environmental objectives:

Protection of species and habitats, and the

conservation of biodiversity and natural

resources;

Protection of the environment against

disturbance, deterioration, contamination

and/or destruction as a result of human activity

and structures;

Providing a remediation plan for all business

units;

Providing a healthy working environment for

its personnel.

HIGHLIGHTS

• No instances of non-compliance with environmental laws and regulations;

• No complaints or concerns regarding environmental matters filed;

• No significant fines were levied nor non- monetary sanctions imposed;

• Denel recorded the lowest electricity usage in the last 7 years.

• Spent R5m (2013/14: R14m) on environmental protection and related expenditure; and

• Achieved 11.8% (2013/14: 10.3%) in energy savings which translated to equivalent emissions of 12 800 metric tonnes of CO2

ENVIRONMENTAL RESPONSIBILITY

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THANK YOU